Overpayments in the long-term care insurance industry become more prevalent with each passing year, in concert with the increase of claims paid. Each year, insurers pay out hundreds of thousands of dollars on LTCi policies that are not owed. This not only results in financial loss, but also leads to over-inflated reserves. The problem persists because it is increasingly difficult for companies making the payments to obtain timely information and to identify issues. Many recipients of overpayments spend what they have been paid and have little else to recoup, while others have since died, and their estates/heirs/next of kin can be impossible to locate or deal with. If companies do not recognize this quickly, the recoupment process can be more complex.
Overpayments occur for a variety of reasons. The most common is simple mistake, miscalculation or clerical error. More complicated scenarios occur when evidence shows that an insured who has been receiving benefits should not have, for a variety of reasons. This latter occurrence, which may or may not include implications of wrongdoing or fraud, creates a complicating factor that may require a remedy at law if the recipient(s) is unwilling to re-pay the company when asked. We have recently seen a trend in overpayments where insureds have passed away, and their spouse/next of kin (or even caregiver) will request/receive benefits not owed.
Once an overpayment has been identified, how does a company recover it? For the most part, many states do not have any insurance-specific statute or regulation surrounding the unilateral recovery or recoupment of overpayments from future benefits (some states have overpayment statutes for workers’ compensation, employee pay/benefits, etc.). Other states have statutes that are perhaps not long-term care insurance specific, but instead pertain to life, health, and accident policies. Overpayment recovery is entirely state and situation specific. Where no state statute is readily available, it is possible in some situations to defer to NAIC Model 903, Section 4, Subsection M.
NAIC Model 903 (for Life, Accident, & Health Claims Settlement Practices) states:
M. No insurer shall withhold any portion of any benefit payable as a result of a claim on the basis that the sum withheld is an adjustment or correction for an overpayment made on a prior claim arising under the same policy unless:
- The insurer has in its files clear, documented evidence of an overpayment and written authorization for the insured permitting the withholding procedure, or
- The insurer has in its files clear, documented evidence that:
- The overpayment was clearly erroneous under the provisions of the policy and if the overpayment is not the subject of a reasonable dispute as to facts;
- The error that resulted in the payment is not a mistake of the law;
- The insurer has notified the insured within six (6) months of the date of the error, except that in instances of error prompted by representations or nondisclosures of claimants or third parties, the insurer notified the insured within fifteen (15) days after the date the evidence of discovery of such error is included in its file. For the purpose of this rule, the date of the error shall be the day on which the draft for benefits is issued; and
- The notice stated clearly the nature of the error and the amount of the overpayment.
Overpayments should only be recouped by unilateral withholding of future policy benefits if the overpayment was clearly erroneous or made by mistake, there is no reasonable dispute as to the facts surrounding the overpayment (and its amount), and there is no mistake of the law. Put differently, unilateral recoupment should likely be used only in straightforward situations (i.e., for simple mistakes, miscalculations, wrongful deposits). Any overpayment where (i) there may be fact issues; or (ii) there is any potential legal argument or issue raised (or to be raised) by the recipient of the alleged overpayment, should illicit further scrutiny or legal assistance.